A beginners guide to… Top-down vs. bottom-up investing

by | Sep 4, 2017

When deciding where and how to invest, two kinds of investment styles are most widely known, top down investing and bottom up investing.

What are these?

The top-down style is an approach which looks at the wider macroeconomic picture. This basically means looking at potential investments using a more global perspective, asking questions like, ‘How will this world event affect my investment?’

Looking at macroeconomic factors and using these to decide where or what to invest in, means you look at the large scale general economic factors which are effecting economies across the world to pick the investment you think will be best for you.

To understand this concept, it helps to compare top-down to bottom-up. A bottom-up investor is more concerned about individual companies and their performances, remaining less concerned about the outside influences such as interest rates, geopolitical risks and currency problems, which are usually all included under the banner of ‘macro’ issues.

Put simply, top-down is looking at the broader picture, such as the effects of economic conditions on whole industries and sectors, and deciding where to invest based on which areas they think are likely to be affected.

Here are some of the factors that individual and institutional investors may consider with a ‘top-down’ approach: –

  • The effect that interest rates will have on an economy. Is the central bank of a particular country considering raising or lowering rates? What impact will that have on stocks? For example, bank stocks tend to benefit from higher interest rates, so this may be a factor to consider.
  • The effect of geopolitical circumstances like war, sanctions and other factors which affect international relationships. How will these affect certain industries? Perhaps if a country is rapidly developing its military, defence stocks may be a wise decision for the prudent investor.
  • The overall strength of an economy. For example, if European growth is lacklustre, while Asian markets are booming, the investor may consider the latter a better investment opportunity for the long term.

Conversely, the bottom-up style mainly sidelines those wider issues, and focuses on choosing stocks based on the characteristics of the individual company. However – they do not ignore the macroeconomic picture completely. Every kind of investment is linked to the wider economy, no matter how much it seems to be independent of it.

These investors may ask questions like: –

  • How has this firm performed over time?
  • Does it have good prospects?
  • Does it have good management?
  • How does it compare to it’s rivals?
  • Does the company have the ability to identify new markets overseas which may have a lot of potential for the business?

This investor wants to find a company that’s going to remain strong regardless of what’s happening in the wider markets. They don’t necessarily pick a stock based on what sector it’s in or what’s happening to that sector as a whole, they have more of a laser focus on the business itself and its viability.

Let’s imagine a scenario. There is a large storm brewing in a town, with high winds that could damage properties. In this situation, a top-down investor is more interested in looking at the effects of the storm itself. Where is it moving? What other parts of the area is it likely to affect? What will the long term ramifications? The bottom-up investor meanwhile is looking at the strength of the individual buildings during the storm. They want to know about their individual house (stock investment for example). Does their house (investment) have a strong foundation (fundamentals) that can weather the storm? Will it still be there and have people living in it (buying its goods) even when the storm is raging?

The type of approach that an individual or fund will use to find the best investment also depends on which type of asset class they are considering. For example, in commodity investing, the value of these instruments is almost entirely dependent on macroeconomic factors (top-down). The price of gold is strongly correlated with geopolitical risk, as this precious metal is considered to be a ‘safe haven’ investment, which investors may look to invest in during times of volatility in the financial markets. The price of other metals like copper can depend on the prosperity of countries which depend on it for manufacturing and construction, like China. A slowdown in the Chinese economy may put downward pressure on metals prices, as they are building less, and by extension have less need for these materials. Overall, it is only really when investors are considering buying stocks that they have the choice to take either a bottom-up or top-down approach.

Remember…

  • Past performance of an investment is no guide to its performance in the future.
  • Investments, or income from them, can go down as well as up.
  • Risk can be brought about by the performance of world markets, interest rates, taxes on income and capital, and foreign exchange rates.
  • You may not necessarily get back any of the amount you invested.
  • Smaller company shares can be relatively illiquid, meaning they could be harder to trade, which makes them higher risk.
  • Content and information about potential investments are designed for general use, and so cannot be considered personal to your circumstances or your financial position.
  • Don’t drink and invest at the same time!

ALL RIGHTS RESERVED © INVSTR LTD. 2018

Risk Disclosure:
Invstr is a technology platform, not a registered broker-dealer or investment adviser. Invstr does not offer its own recommendations of any security or provide its own research to any user regarding any security transaction or order.

Please note, investing involves risk and investments may lose value. Past performance does not guarantee future results.

Brokerage services of US-traded securities, including fractional trading, are provided to Invstr users by DriveWealth, LLC a registered broker-dealer and member of FINRA/SIPC. DriveWealth may not establish investment accounts to residents of certain jurisdictions. 

DriveWealth provides no tax, legal, or investment advice of any kind, nor does DriveWealth give advice or offer opinions with respect to the nature, potential value, or suitability of any securities transaction or investment strategy. DriveWealth acts as the clearing firm for securities transactions entered on the Invstr mobile platform. DriveWealth is not affiliated with Invstr. Invstr does not participate in DriveWealth’s decision-making.

There is no minimum initial deposit required to open an investing account with DriveWealth. Expenses and Fees associated with the DriveWealth platform in conjunction with Beanstox includes either a monthly membership fee of $4.99 with a commission charge of $0.01 per share* or, in the event the membership fee is not paid, a commission charge of $0.0125 per share applies, subject to a minimum of $2.99 per transaction. There are no monthly minimum fees, or required ongoing minimum account balance. For non-resident aliens, there is a one-time tax verification fee of $5.00 (representing Form W-8BEN pass-through processing cost). View a full list of our fees at http://bit.ly/DWFees

The monthly subscription charge is four dollars and ninety-nine cents (US$4.99) per month plus one cent (US$0.01) per share traded (as examples, for a Transaction of 0.90 shares, the per share traded charge is one cent (US$0.01), and for a Transaction of 1.6 shares, the per share traded charge would be two cents ($0.02), and the quarterly subscription charge is fourteen dollars and ninety-nine cents (US$14.97) every 3 months plus one cent (US$0.01) per share traded. The monthly and quarterly subscription charges may be greater or less depending on additional services offered by a DriveWealth partners as part of the subscription model offering, or based on any subsidies provided by a DriveWealth partner as part of the subscription model offering. For non-resident aliens, there is a one-time tax verification fee of $5.00 (representing Form W-8BEN pass-through processing cost).View a full list of our fees at http://bit.ly/DWFees

This communication is not an offer or solicitation to purchase or sell securities. Investing in securities carries risk, including the loss of principal. Past performance is not indicative of future returns, which may vary. Online trading has inherent risk due to system response and access times that may be affected by various factors, including but not limited to market conditions and system performance. An investor should understand such facts before trading. The risks associated with investing in international securities, including US-listed ADRs and ETFs that contain non-US securities include, among others, country/political risk relating to the government in the home country; exchange rate risk if the country's currency is devalued; and inflationary/purchasing power risks if the currency of the home country becomes less valuable as the general level of prices for goods and services rises. Before investing in an ETF, an investor should consider the investment objectives, risks, charges, and expense of the investment company carefully. ETF prospectuses are accessible within the mobile application via a link under each company’s “Description.”

A fractional share is a share of equity ownership that is less than one full share. Fractional share investing has certain limitations and restrictions that investors should understand prior to purchasing fractional shares: ownership of less than one full share does not give the fractional share owner the right to vote on company matters; fractional shares are non-transferrable, meaning they cannot be transferred to another brokerage firm; and fractional share orders will be accepted as market orders only. For more information and details on fractional shares, and any associated limitations or restrictions please visit: https://drivewealth.com/fractional-shares-disclosure

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ALL RIGHTS RESERVED © INVSTR LTD. 2018

Risk Disclosure:

Invstr is a technology platform, not a registered broker-dealer or investment adviser. Invstr does not offer its own recommendations of any security or provide its own research to any user regarding any security transaction or order.

Please note, investing involves risk and investments may lose value. Past performance does not guarantee future results.

Brokerage services of US-traded securities, including fractional trading, are provided to Invstr users by DriveWealth, LLC a registered broker-dealer and member of FINRA/SIPC. DriveWealth may not establish investment accounts to residents of certain jurisdictions. 

DriveWealth provides no tax, legal, or investment advice of any kind, nor does DriveWealth give advice or offer opinions with respect to the nature, potential value, or suitability of any securities transaction or investment strategy. DriveWealth acts as the clearing firm for securities transactions entered on the Invstr mobile platform. DriveWealth is not affiliated with Invstr. Invstr does not participate in DriveWealth’s decision-making.

There is no minimum initial deposit required to open an investing account with DriveWealth. Expenses and Fees associated with the DriveWealth platform in conjunction with Beanstox includes either a monthly membership fee of $4.99 with a commission charge of $0.01 per share* or, in the event the membership fee is not paid, a commission charge of $0.0125 per share applies, subject to a minimum of $2.99 per transaction. There are no monthly minimum fees, or required ongoing minimum account balance. For non-resident aliens, there is a one-time tax verification fee of $5.00 (representing Form W-8BEN pass-through processing cost). View a full list of our fees at http://bit.ly/DWFees

The monthly subscription charge is four dollars and ninety-nine cents (US$4.99) per month plus one cent (US$0.01) per share traded (as examples, for a Transaction of 0.90 shares, the per share traded charge is one cent (US$0.01), and for a Transaction of 1.6 shares, the per share traded charge would be two cents ($0.02), and the quarterly subscription charge is fourteen dollars and ninety-nine cents (US$14.97) every 3 months plus one cent (US$0.01) per share traded. The monthly and quarterly subscription charges may be greater or less depending on additional services offered by a DriveWealth partners as part of the subscription model offering, or based on any subsidies provided by a DriveWealth partner as part of the subscription model offering. For non-resident aliens, there is a one-time tax verification fee of $5.00 (representing Form W-8BEN pass-through processing cost).View a full list of our fees at http://bit.ly/DWFees

This communication is not an offer or solicitation to purchase or sell securities. Investing in securities carries risk, including the loss of principal. Past performance is not indicative of future returns, which may vary. Online trading has inherent risk due to system response and access times that may be affected by various factors, including but not limited to market conditions and system performance. An investor should understand such facts before trading. The risks associated with investing in international securities, including US-listed ADRs and ETFs that contain non-US securities include, among others, country/political risk relating to the government in the home country; exchange rate risk if the country's currency is devalued; and inflationary/purchasing power risks if the currency of the home country becomes less valuable as the general level of prices for goods and services rises. Before investing in an ETF, an investor should consider the investment objectives, risks, charges, and expense of the investment company carefully. ETF prospectuses are accessible within the mobile application via a link under each company’s “Description.”

A fractional share is a share of equity ownership that is less than one full share. Fractional share investing has certain limitations and restrictions that investors should understand prior to purchasing fractional shares: ownership of less than one full share does not give the fractional share owner the right to vote on company matters; fractional shares are non-transferrable, meaning they cannot be transferred to another brokerage firm; and fractional share orders will be accepted as market orders only. For more information and details on fractional shares, and any associated limitations or restrictions please visit: https://drivewealth.com/fractional-shares-disclosure

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